The Subscription Economy and How You Can Harness It

Since 1999, over half of the companies that made up the FTSE 100 have left the index. Former household names including the likes of Abbey National, ICI and Invensys have disappeared entirely from the list following a series of mergers and takeovers. What’s more is that this phenomenon isn’t unique to the UK market. In 1975 the life expectancy of one of those Fortune 500 companies was 75 years, and today it stands at just 15 years. One can’t help but wonder why this is happening.

The old way of doing business – shipping and selling discrete, static products – is no longer working. Today we’re living in a subscription economy, where ongoing services and digital transformation are paramount.

When we think of British Gas, we tend to think of them as a utilities provider, specialising in supplying gas and electricity and boilers. Yet the firm’s recent foray into the connected homes market with the 2012 launch of its dedicated business unit of the same name, saw the inception of Hive. The business now champions an app aimed at the digital-first consumer, and monetises its offering through a subscription-based model. Similarly, most of us think of IBM as selling computers, mainframes, and workstations. What does IBM say it sells today? It sells cognitive data services like Watson Analytics. It sells IBM ‘as a service’.

A Digital World

Consider the new wave of disruptors like Uber, Netflix, Spotify, Airbnb, Box. The MIT professor Andy McAfee calls them platform companies. These companies have invented completely new markets, new services, new business models, new technology platforms. They did this by using digital technology to create brand new experiences that are influencing more and more of our daily lives. These companies all realise that we now live in a digital world, and in that digital world, it is no longer sufficient just to design and ship products. The modern digital-first consumer expects a very different experience.

They expect an experience that gives them outcomes without the hassles of ownership. They expect an experience that is customised and personalised, that watches their behaviours, remembers their preferences, and adapts to their needs. An experience that evolves, improves and continuously delights.

If you’re starting a new business in the subscription economy, you need to stop treating your customer as someone whose sole purpose is to buy your product. You will build a much healthier business, create a stronger strategic advantage, and accelerate your growth if you re-imagine your customers as subscribers. Subscribers represent potentially far more value to your business, but they need to be treated like intelligent, discerning business partners rather than single points of sale.

It’s a very exciting time. An old era is coming to a close. Digital transformation is the new opportunity. The world GDP stands at $80tn, and all of it is up for grabs. So how can companies succeed in the subscription economy? Let’s break it down by role and business need.

Finance

Ten years ago, the core imperative of the finance department was to track all the expenses in your company and align them with your unit of sale fixed costs. These were then tallied up in order to arrive at a tidy marginal profit. Things were fairly simple.

Today, however, your expenses need be aligned to acquiring revenue over time. That entails a whole new array of subscription finance metrics: the cost of customer acquisition, lifetime customer value, the average revenue per customer. Sales and marketing costs, for example, start to act more like capex than opex. Why does Netflix make massive investments in content that isn’t technically ‘sold’ to anyone? Because their finance team is obsessed with maximising the average lifetime value of their subscribers, and they can tie those costs directly to average customer lifetime value (ACLV).

Sales and Marketing

On the sales and marketing side, the question has changed from the relatively straightforward “how do I move more units off the shelf in order to lower my cost per unit and increase my profit margins?” to “given that subscription pricing is fairly elastic, how do I experiment with new pricing and bundling ideas? How can I rearrange my offering to move quickly into a new market segment?”

For example, when SurveyMonkey, the £550m VC-backed company decided to pursue overseas markets, they were able to quickly support 17 different languages, 28 currencies and dozens of new product packages. That’s a startling amount of business agility. That represents the freedom to experiment and deploy.

Executive Leadership

Finally, in terms of overall executive leadership, the key imperative is transforming your entire organisation to become relentlessly subscriber-focused. In the product economy it was fine to work in traditionally siloed organisational structures — in fact, it was practically mandated. Marketing handed off their research to product, which in turn passed the baton over to sales. That model is no longer operative. In this new world, where the subscriber at the centre, these silos must come down.

So how will you wrap your company around your subscribers? It starts with finding out what’s most important to them and putting those imperatives on a wall. In large letters. Use this approach to rethink how you approach your fundamental business model. By pricing in support of your overarching business goals, you’ll be able to cultivate deeper customer relationships that hinge on more than simply your product offering, but instead speak to your identity as a brand. Listen, don’t talk. Good luck!